Posted by JohnBoy on May 14, 2000 at 20:01:27:
To get a conventional loan, you must qualify. Income, credit, LTV (loan to value on the property), time on the job, etc.
Getting hard money is based only on the property you’re buying. Either way you will need an appraisal done to determine what the property is worth. The appraisal will need to come from an appraisor approved by the hard money lender, so don’t just run out a pay for any appraisal until you find out who the hard money lender requires you to go through. Otherwise you could end up paying for two appraisals if the lender doesn’t except the one you got. Using a conventional loan will mean, down payment, credit, income verification, time on the job, etc. Using hard money will only require the value of the property.
A true hard money lender doesn’t care about you, your credit, income, job, etc. They only care about the property. When loaning up to 65% of the property’s appraised value the hard money lender knows his cash is fully secured in the property. If you don’t pay, he can sell the property and even at a discount to get his cash back and still make a profit because of the equity left in the deal.
Conventional lenders don’t work that way. They want to see you put cash in the deal unless of course the property is going to be your personal residence and you “qualify” under all their guidelines to get approved. A coventional will loan based on the actual appraised value OR the actual purchase price, which ever is LOWER. A hard money lender will loan up to 65% of the actual appraised value regardless of how much you’re paying for the property.
Another way around this is by establishing a credit line with a bank. Then you can access that line by paying cash without qualifying since you’ve already qualified for the credit line. This would be a lot less costly than a hard money lender, but if you can’t qualify for a credit line at this time, then a hard money lender would work if the deal makes sense.
You can find hard money lenders through mortgage brokers, title company’s, real estate attorney’s, bankers, realtors, real estate clubs, etc. Most of these sources deal with hard money lenders in one way or another and would know who they are in your area. Just start asking around and one of these sources can point you in the right direction.
The most common use of hard money lenders is on run down properties that need a lot of work and no one else wants to buy. You can make low ball offers on these and use hard money to purchase them, fix them up and resell at retail for a nice profit. If the deal makes sense and will support all the costs involved then the cost of getting the money doesn’t matter much if thats what it takes to do the deal and make a nice profit.
When dealing in run down properties you need to figure all your costs involved carefully to insure you make a decent profit after all your time and work involved. If you under estimate your costs you can absorb losses instead of making profits.
As a rule, you determine what the retail value of a property is worth once it’s all fixed up and brought up to market value. Then figure 70% of that value as a starting point. From there you deduct all the fix up costs, holding costs (payments being made on the money borrowed while you’re fixing it up. Figure up to 6 months to fix and resell), selling costs (if you’re going to use a realtor to list the property then figure in 6%-7% for the commission), advertising costs, points and interest charged by the hard money lender, allow for under estimates in your fix up costs, and deduct all that cost from the 70% starting point. That is the most you can offer on a property and expect to make a profit after all the smoke clears.
If you don’t know what the repair costs are, you can call a handyman or a contractor to come out and give you a written estimate of what they would charge you to do all the repairs needed. Usually you can get a free estimate from them. But if you don’t hire them to do a job for you from time to time then getting them to come out everytime you get a property under contract and give you an estimate isn’t going to happen. You can also flip the property if you’re not interested in doing all the repairs. Then you don’t need a lender. Just figure out all the costs involved, figure at least $15k - $20k profit in the deal to the rehabber your flipping to and add in your profit on top of that. Then you just assign your contract to the rehabber for a few grand and your out of the deal with some fast cash in your pocket.